Firstsource Solutions Limited - SKP Moneywise · Firstsource Solutions Limited (FSL) established in December 2001 by ICICI bank, is a leading global provider of Business Process Management

February 18, 2014

Firstsource Solutions Limited.

Looking Ahead with Confidence…

CMP Rs. 29 Target Rs: 40 Initiating Coverage - Buy

SKP Securities Ltd www.skpmoneywise.com Page 1 of 13

z

Face Value (Rs.) 10

Equity Capital (Rs.Million) 6,587

M. Cap (Rs. Million) 19,367

52‐wk High / Low (Rs.) 29.65/9.40

Avg.Volume (qtrly) 1036167

BSE code 532809

NSE code FSL

Bloomberg code FSOL:IN

Key Share Data

Shareholding Pattern (as on Dec 31,2013)

57%

3%5%

35%

Promoters

FII

DII

Others

Source: Company data, BSE

Particulars FY12 FY13 FY14E FY15E FY16ENet Sales 22550 28185 30722 33902 37785

growth (%) 25% 9% 10% 11%

EBIDTA 1851 2796 3582 4076 4542

PAT 622 1463 1875 2574 3081

growth (%) 135% 28% 37% 20%

EPS (Rs.) 1.44 1.72 2.85 3.91 4.68

BVPS (Rs.) 33 26 29 34 39

Key Ratios FY12 FY13 FY14E FY15E FY16E

P/E (x) 20.4 17.1 10.3 7.5 6.3

P/BVPS (x) 0.9 1.1 1.0 0.9 0.8

M.Cap/Sales (x) 0.6 0.7 0.6 0.6 0.5

EV/EBIDTA (x) 8.5 9.7 7.5 5.8 4.6

ROCE (%) 5% 7% 10% 11% 12%

ROE(%) 4% 9% 10% 12% 13%

EBIDTA Mar. (%) 8% 10% 12% 12% 12%

PAT Mar. (%) 3% 5% 6% 8% 8%

Financials (Rs In Million)

Price Performance FSL v/s CNXIT

‐100.0%‐75.0%‐50.0%‐25.0%

0.0%25.0%50.0%75.0%

100.0%

Apr‐1

1

Jul‐1

1

Oct‐1

1

Jan‐1

2

Apr‐1

2

Jul‐1

2

Oct‐1

2

Jan‐1

3

Apr‐1

3

Jul‐1

3

Oct‐1

3

Jan‐1

4

FSL CNX‐IT

Analyst: Rupali Singh

Tel No.:+91 22 4922 6006; Mob: +919820501348Email: [email protected]

Company Profile Firstsource Solutions Limited (FSL) established in December 2001 by ICICI bank, is a leading global provider of Business Process Management (BPM) services. Further, in 2012, it was acquired by RP‐Sanjiv Goenka group. With 29946 associates spread across 47 global delivery center. FSL serves clients in the Healthcare, Telecom & Media, BFSI industries from its delivery centers in India, USA, UK &Europe, Philippines and Sri Lanka.

Investment Rationale Obamacare policy will impel the growth in the Healthcare vertical:

“Obamacare” mandates the Americans to purchase health insurance in 2014 or else face penalties. This regulation will cover around 30‐40 million Americans into the insurance net.

We expect that with the implementation of Obamacare in the US will increase the awareness for quality and affordability of Healthcare, reduce the number of uninsured through public and private coverage and it will also benefit BPO sectors to reduce cost, enhance IT skill with EMR/EHR (Electronic medical record processing, raise member enrollments, billing, claims, administration and data analytics.

De‐leveraging the balance sheet:

The company have net debt long term position of USD 136 million on its US books. It will be repaying USD 45 million of its debt every year through internal accrual which would result in repayment of USD 135 million of its debt by FY16E and remaining in FY17E. We expect repayment of debt will further increase the FCF generation and the strengthen the company’s financial position.

Chasing deals will enhance the Order book:

In Q3FY14 the company has witnessed significant improvement in deal pipeline. It has signed a deal of ~USD 40 million, primarily from the customer management segment. It has also bagged the renewal of the deal from its existing customer in USA for three year TCV (total contract value) of USD 45 million. FSL is also awaiting for deal of ACV (annual contract value) USD 20‐30 million to get sanctioned within a few months. Further, we expect the company will enhance its focus on customer management and healthcare segment which will result in chasing deal pipeline in the Healthcare, BFSI and telecom & media segment.

Topline to grow at CAGR of 10% between FY13‐16E: We expect robust growth in healthcare with implementation of

Obamacare, focus on customer management and continue chasing large strategic deals from health care, Telecom & media and BFSI segment will lead to grow at CAGR 10% between FY13‐16E.

Outlook & Recommendation: We expect FSL to report moderate revenue growth with improvising

operational efficiencies, focus on customer management and healthcare segment which will help to pick up order pipeline.

We recommend Buy rating on the stock with the 15 month target price of Rs. 40 per share, implying an upside of ~35.2% from current levels. We have arrived at the target by assigning to PE multiple of 8.5x on FY16E.


SKP Securities Ltd. www.skpmoneywise.com Page 2 of 13

The company: Snapshot

Firstsource Solutions Limited (FSL) established in December 2001 by ICICI bank, is a leading global provider of Business Process Management (BPM) services and it is also ranked among India’s top three pure play BPM companies.

RP‐ Sanjiv Goenka group’s flagship electricity generation and distribution firm, CESC limited, led the race to acquire Firstsource Solution and elected to be the new promoter of the company. A combination of preferential allotment, secondary purchase and open offer has enabled RP‐Sanjiv Goenka group to get a hold and ownership of 56.86%.

The RP‐ Sanjiv Goenka Group is India’s youngest business group established in 1820. The group has diversified interest across various sectors ‐ Power & Natural Resources, Carbon Black, IT & Education, Retail, Media & Entertainment and Infrastructure ‐ with the total asset of over Rs 232.50 billion and employee strength of more than 50000.

Key Milestones

Year Event2001 Established as ICICI Infotech Upstream Ltd. by ICICI bank, India

Name changed to ICICI OnesourcesAcquired Customer Asset ‐ UKAcquired First Ring ‐ USWest Bridge (now managed by Sequoria Capital) invested in the companyAquired majority stake in pipal Research, USTeamsek made a strategic investmentAcquired Accounts solutions group‐ US

2005Entered the Healthcare & Publishing industries through the acquisition of RevIT IndiaInked strategic partnership with Metavante.Started operations in Northen Ireland and ArgentinaChange of name to Firstsource Solution LimitedAcquired Business Process Management Inc. USListed on Indian Stock ExchangeAcquired MedAssist ‐ US

2008Signed a 5 year, USD 80 million Outsourcing deal with Barclay Card US

2011 Joint Venture with Dialog Axiata and enters Sri lanka

2012RP‐ Sanjiv Goenka's CESC makes a strategic investment in the company

2002

2003

2004

2006

2007

Source: Company & SKP Research

FSL is an innovative provider of customer centric business process services with the network of 47 Global delivery centers built across the globe, including 24 centers located in India, 14 in the US, 6 in UK & Europe, 2 centers in Philippines and 1 center in Sri Lanka. The company leverages the “Rightsource” delivery model to provide services in the Banking & Financial Services, Insurance, Media & Publishing, Telecommunication and Healthcare industry.

The company provides end to end customer life cycle management services across different industry verticals. It also works with several global clients including 21 Fortune 500, 9 FTSE 100 companies in the US, UK and India. Over the period the company has developed its client base which includes around 700 hospitals in the US that help it to obtain ongoing work as well as gains a greater share of their BPM outsourcing budget.



The company has crafted its business structure into three dimensions ‐ distinct service offerings, horizontal geographical delivery centers and vertical market focus ‐which are highly relevant from a market facing perspective across sales, client management, marketing and solution.

FSL offers a complete suite of BPM services across the customer life cycle, including customer management, customer acquisitions, customer care, complaint management, collection (financial, healthcare, & Education), Data processing services and Business transformation.

Services OfferingsPayer Provider

Customer Management CollectionsTransactions Processing

Geographical delivery centers

US & India US

US, India, UK & Philippines

US, India, Philippines & Sri Lanka

HealthcareBFSI T&M

Industry


The Healthcare business bifurcated into two‐ Healthcare payer & health care provider. This vertical

contribute~ 32% where it provides the services in the US and India and it also competes with large global IT companies sited in the US such as Dell, Xerox, HP, CSC, IBM, Cymetrix and NCO group. The company also faced competition from Offshore BPM providers in India such as Apollo Health street, Hinduja Global, HOV services and some of the IT companies which have BPM divisions Wipro and Cognizant.

Healthcare Payer business The company’s healthcare payer business revenue contributes ~ 40% of the total healthcare division

where it provides BPM solutions to the top insurance companies. FSL provides services such as 1) Front end office and Mailroom solutions, 2) Data conversion, 3) Claims processing/ adjudication and 5) Member Enrollment & Eligibility services through both onshore and offshore delivery centers. It has processes claims for leading healthcare payers, including many Blue cross & Blue shield plans, third party administrators and provider based health plans.

Healthcare payer Mail roomData conversion

Member enrollment

Claims processing & adjudication

Client support

IT Support

Insurance companies

Mail handling & Document management

Workflow enabled image management

Entry in system

Member and provider eligibility

Member service

Database Design Database maintenance

Third party Administrators

Scanning & reject handling

OCR/ICR technology Data capture with integrated database validations

Database maintenance

Service line verfication Allocations of benefits, Claims repricing

Data "Ehelp" Data cleansing

Managed care Organisations

Indexing Archival Priniting

Customized output generation (ANSI837, NSF etc.)

calls to validate information

Other earner liability processing Bundling and dupicate analysis

Provider services HIPAA compliance support

System design & support Maintenance & support




Healthcare Provider business

The health care provider division contributes revenue around 60% of total healthcare division. The company offers revenue cycle performance services to the hospitals and physician groups. This service includes Eligibility services, enrollment, receivables management, maximize reimbursement, recovery and collection services to over the 700 hospitals and health system across 35 states in the US.

Healthcare provider

Patient services Eligibility service Receivables management collections services

Patient contact and registration Insurance verification and certification

Medicaid review and management Assisting patients with secondary Medicaid coverage

Ongoing & cleapup projects for all payor classes ‐ Initial billing, follow up and denials management

Custome telephone collection campaign Small balance collection

Patient visit management

Charity assistance Handling all aspects of providing charity assistance

Self pay "Early out" cash acceleration ‐ management of patient interaction to ensure maximum revovery

Skip tracing services Cash acceleration services

self pay conversion MedAssist Advantage plan (MAP) Innovation hospital credit card in conjuction with US bank

Management of provider enrollment and billing for out of primary state Medicaid receivables Credit balance resolution

Attorney services

Hospitals Physician groups


Telecom & Media

FSL specializes in providing telecom outsourcing services such as order management, provisioning process and billing systems which supports service activation, changes in orders or provisioning, removing for voice and data network circuits, managing provisioning phases and critical dates, co‐ordinating customer readiness and turn up services, churn management, fraud detection management, revenue assurance and billing & collection.

The company provides Telecom & media services in the US, India, Philippines and Sri Lanka and contribute ~45% of the total revenue. FSL faces competition from large BPM companies such as Convergys, Sitel, Capita, Serco, Teletech, Sykes, conduit, Transcom, Accenture, Hero, TSC and Vertura and from India, BPM division of IT companies HCL, Tech Mahindra, Infosys, Wipro and IBM Daksh.

Telecom & Media

Sales & Marketing

A/c setup & activation Customer services

Billing/ Help desks support

Receivables & collection management Saves/ win back

Mobile/ Wireless Inbound salesProvisioning Order & return

General inquiries Information requests

Invoice requests & complaints

Overdue collections

Dispute resolution

Broadband/ High speed Internet Outbound sales

Logistics coordination Porting support

Customer service Welcome calls

Billing disputes Process queries for charges

Credit limit/ expiry

Fixed Wireline Lead generation

Order input Account administration

Account management Billing issues

Inbound internal handoffs calls

DTH/pay TV Cross sell/ upInternal actioning requests

Technical support Help desk Technical support

High usage management Billing issues

Increasing customer awareness for chosen plan Increase tolling




Banking, Financial services & Insurances (BFSI)

In this vertical the company provides end to end contact center and back office processing solutions to credit card, retail banking customer across the customer life cycle from customer acquisition, application processing, customer care and retention, account administration, claims processing and collection. This vertical support to contribute ~22.80% of the total revenue from the US, UK, India and Philippines.

Financial Services Customer service & fullfilment Transaction processing Collection

Credit cards

Account maintenance ‐ Activation & authorization, Account closure, Lost & stolen cards

Check, remittance and item processing Fund transfer & forex transactions

Early stage collections ‐ 1st party, Pre‐ charge off

Custody

Late stage collections ‐ 3rd party collections, skip trace

Retail BankingMortgage

General & Life Insurance

Mortagage ‐ Origination, Loan vault conversion, collateral review, Underwritting, Loan booking

Insurance ‐ application processing, Policy amendments, Policy amendment/ collection, Data & trend analysis

Interactive services‐ (Email/ web chat), Upselling, Cross selling, Disputes & complaint resolution

Query management ‐ Transaction related, Payment related, Product related, Helpdesk activities

Custody operations & fund service ‐ Portfolio valuation & reconciliations, Contract note generation, Settlement, corporate actions, Billing suport, Performance audit


In BFSI division, FSL competes with NCO group and Convergys in receivable management and collection services. In the credit card collection/recovery services, the competitors are iQOR, GC services, Outsourcing Solutions Inc. (OSI), Epicenter, Zenta and Teleperformance. The company also faces competition from offshore BPM provider and IT companies in India such as Genpact. EXL, TCS, Infosys, Wipro, HCL, IBM and HP.

Revenue by Industry FY11 FY12 FY13 FY14EBFSI 26.2% 28.1% 24% 22.8%Telecom & Media 36.7% 36.9% 44% 44.6%Healthcare 35.8% 34.3% 32% 31.9%Others 1.4% 0.8% 1% 0.6%

Revenue by Geography FY11 FY12 FY13 FY14EUS (incl. Canada) 57.5% 53.7% 46.2% 46.1%UK 30.5% 30.6% 34.2% 35.6%India 11.1% 11.4% 10.5% 9.3%Rest of the world 1.1% 4.4% 9.1% 9.0%

Revenue by Delivery location FY11 FY12 FY13 FY14EOffshore 27.0% 23.0% 21.2% 21.3%Domestic 11.1% 12.7% 11.2% 10.2%Onshore 62.0% 64.3% 67.7% 68.5%




Outlook of BPM Industry:

Changing business model, the emergence of new technologies, buyer segments and solutions for emerging market give an opportunity to India to retain its position as the global sourcing leader. India is the only country that offers the depth and breadth of solutions & offerings across various segments of this industry such as IT services, BPM, Engineering, & R&D, Internet & mobility and Software Products. IT services are a USD 50 billion market size, BPM is USD 20 billion market size, Engineering segment has crossed 10 billion and other emerging segment are software products, Internet & mobility.

The BPO industry has moved way ahead from the low end call center work that it started earlier. Now it handles a whole range of business processes, including many high end services, Business transformation and platform based solution in different industries. Today these BPOs are not only handling complex technical issues and ceased to look as a primary outsourcing destination, but it has also developed a global delivery model, Analytics based solution, supply chain management and providing business transformation services across the globe. In short, these BPO have become Business Process Management (BPM).

Despite Economic uncertainties, inflation, rupee volatility, Indian IT‐BPM industry has sustained its growth trajectory and clocked export revenues to USD 86 billion with a YoY growth rate 13.15%. Domestic market will remains steady to USD 32 billion in FY14.

Indian IT‐BPM revenue breakup up (USD billion) Total addressable market (USD billion)

0

20

40

60

80

100

120

FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014

41 47.5 50.1 59 69 76 8622 21.9 23.8

2932

3232

Export Domestic

0

50

100

150

Healthcare Telecom & Media

BFSI

10 16 27

80

30

150

2011 2012

Source: Nasscom & SKP Research

As of today (2013) the Global BPM spending stand at USD 130 billion across different sectors. It is expected to grow to USD 233 billion by 2020. This growth will prop up by Changing regulatory conditions in healthcare (Obamacare) in the US and Banking, Financial Services and Insurances (BFSI) in the Euro Zone and significant business process as a service (BPaaS) will adopt in horizontal services.

These growing key drivers will help the Indian BPM sector to further accelerate growth to USD 50 billion by 2020 from USD 20.8 billion today. According to Nasscom, IT ‐BPM industry will register 13‐15% growth in FY15 with improvement in the US & Europe economy. On the flip side, the domestic IT‐BPM growth is expected to be laggard at 9‐12% for the FY15, primarily due to the 2014 election, inflation, rupee volatility and other factors impacted discretionary IT spend.



Investment Rationale:

Obamacare policy will impel the growth in the Healthcare vertical: The Patient Protection and Affordable Care Act, popularly known as “Obamacare” mandates the

Americans to purchase health insurance in 2014 or else face penalties. This regulation will cover around 30‐40 million Americans into the insurance net and it will also helps to increase the outsourcing firms across multiple constituents such as employers, carriers (insurers) and providers (hospital).

The US government has allocated a US$ 530 million, one year contract to Vangent, a General Dynamics company, to set up call centers dedicated to answering public inquiries regarding the Health Insurance Exchange (HIX).

The Minimum Medical Loss Ratio (MLR) is part of the Affordable Care Act. The MLR requirements set minimum % of premium that health plans must spend on health care (medical costs and activities that improve health care quality improvement). Many insurance companies spend a substantial portion of consumer premiums on administrative costs and profits. With this MLR, the minimum % of premium health plan spent on health care is 85% for large and 80% for small groups and individual policyholders. This regulation puts a cap on the administrative spending cost of the insurance companies, improvise the care quality, lower premium.

The Act significantly alters the obligations and regulation of non profitable hospitals by imposing new conduct and reporting obligations. It requires the hospitals to undergo community health needs assessment, furnish emergency care in a nondiscriminatory manner, alter billing and collection practices and maintain written financial assistance policies that provides information about eligibility, reduce the administrative cost.

Over the five years (FY2011 to FY2015), the Act has been investing USD 11 billion in Health centers and USD 1.5 billion in the National Health services Corps. These expansions are expected to result in a doubling of the number of patients served and also raising the total number of health center patients from 20 million in 2010 to ~40 million by 2015.

In 2010 National Health care spending in the US constituted USD 2.7 trillion or USD 8650 per capita. According to Center for Medicare & Medicaid Services (CMS) report, the US health care spending will account for 19.8% of overall US spending and it is expected to hit USD 4.6 trillion in 2020 or average around USD 13710 per capita.

Obamacare policy adds 30 million people in the US to the health insurance net and the US Department of Health & Human Services estimates that call centers will receive about 42 millions calls about US federal marketplaces this year. The US government has already awarded contract to Vangent Inc. According the Gartner estimates, the US healthcare payer market is expected to grow by 6.05% to reach USD 17.9 billion in 2013. The new regulation will boost business of Business Process Outsourcing/ Business Process Management. This will lead to a growth of 9.8% and an earned market size of USD 1.66 billion in 2013.

We expect that with the implementation of Obamacare in the US, there will increase the awareness for quality and affordability of Healthcare, reduction in the number of uninsured through public and private coverage which in turn will benefit BPO sectors to reduce cost, enhance IT skill with EMR/EHR (Electronic medical record processing, raise member enrollments, billing, claims, administration and data analytics.



De‐leveraging the balance sheet: During FY13, the company repaid its outstanding FCCB obligation worth USD 237 million in December

2012 through cash reserves, capital infusion and external commercial borrowings. Further, RP‐Sanjiv Geonka Group took over the reins of Firstsource which resulted in a change in management control.

FCCB repayment schedule

Repayment of FCCB ‐ USD 237

million

1.) Internal accrual ‐ USD 135 million

2.) Raise new ECB loan & Term loan‐ USD 51 million

3.) Issue fresh equity ‐ USD 51 million


The company have net debt long term position of USD 136 million on its US books. It will be repaying

USD 45 million of its debt every year through internal accrual which would result in repayment of USD 135 million of its debt by FY16E and remaining in FY17E. We expect that repayment of debt will further increase the FCF generation and the strengthen the company’s financial position.

Chasing deals will enhance the Order book: The company is focusing on customer management and healthcare segment. In the customer

management Business, FSL interaction is not only through the call center, but it is also through web email, chats and social media. This will help customers improve the revenue through services the client provide and also build up the brand as well as increase the ability to sell. In the Healthcare segment, the health care exchanges have picked up online enrollments almost to 2‐2.5 million. It is witnessing increases momentum of handling post enrollment service to the people of FSL’s top seven to eight clients. This opportunity will drive the growth in healthcare and customer management.

In Q3FY14, the company has witnessed significant improvement in deal pipeline. It has signed a deal of ~USD 40 million, primarily from the customer management segment. It has also bagged the renewal of the deal from its existing customer in the USA for three year TCV (total contract value) of USD 45 million. FSL is also awaiting for deal of ACV (annual contract value) USD 20‐30 million to get sanctioned within a few months.

In the Healthcare provider business, the company is chasing the order around USD 17‐18 million that will translate into USD 8‐9 million revenue in FY14 and remaining order is expected to convert in FY15. Further, we expect the company will enhance its focus on customer management and healthcare segment which will result in chasing deal pipeline in the Healthcare, BFSI and telecom & media segment.

Collection business will remain flat, but Retail banking division will grow ~10‐12% BFSI business has been facing multiple headwinds from outstanding loans, lower credit card issuances

and decline in charge off rates. With these hurdle, Collection business will remain flat during the FY14E and FY15E.

In the BFSI segment, the company is setting up a new center in Cebu, Philippines where the company has signed up an order to provide services in retail banking. This will drive the growth in Retail banking, custody division which it is expected to grow by 10‐12% during the FY14E and 12‐15% in FY15 &FY16E.



Financial Outlook:

Topline to grow at CAGR of 10% between FY13‐16E: We expect that good utilization, witnessing robust growth in healthcare with implementation of

Obamacare, focus on customer management and continue chasing large strategic deals from health care, Telecom & media and BFSI segment will lead to grow at CAGR 10% between FY13‐16E.

Revenue & Revenue Growth (%)

20,55

3

22,55

0 28,18

5

30,72

2

33,90

2

37,78

5

09.7%

25.0%

9.0% 10.4% 11.5%

0%

5%

10%

15%

20%

25%

30%

‐

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

FY11 FY12 FY13 FY14E FY15E FY16E

Revenue (Rs. in million) Revenue growth (%)


Improve seat fill factor & maintain personnel expenses: Over the few quarters the company is focusing on to improve seat fill factor. This will enable to meet

its order execution efficiently and also maintain the % employees cost to net sales around 68.5% during FY14E‐ FY16E.

Head count& Average Seat fill factor

FY11 FY12 FY13FY14E ‐ (3 Qtr.)

Total Employee 26413 30086 31872 29946Net addition 1553 3673 1786 540Employee in India 19632 21601 20987 19652Employee outside India 6781 8485 10885 10294Average Seat fill factor (%) 74% 75% 80% 81%


Personnel cost/ Net sales (%)

12,7

30

15,2

25

19,3

49

21,0

84

23,2

15

25,8

75

61.9%

67.5%68.6% 68.6% 68.5% 68.5%

58.0%

60.0%

62.0%

64.0%

66.0%

68.0%

70.0%

‐

5,000

10,000

15,000

20,000

25,000

30,000


Employee cost (Rs. in million) Employee cost/ NS (%)




Improvement in Margins: As on FY13, FSL is operating at EBITDA margins of 11.7%. Scope for improvement in seat fill factor and

benefit from currency tailwinds will improve and maintain EBITDA margins around 12‐12.5% between FY13‐FY16E. Currently the company is receiving the benefits of Special Economic Zone (SEZ) which will provide tax reduction benefit. With this benefit, we expect that PAT margin to remain around 7.5‐8% during FY14E‐FY16E.

EBITDA & EBITDA Margins (%) Adjusted PAT & PAT Margins(%)

2,8

32

1,8

51

2,7

96

3,5

82

4,0

76

4,5

42

13.8%

8.2%

9.9%

11.7% 12.0% 12.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

‐500

1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 5,000


EBITDA (Rs. in million) EBITDA margins (%)

1,4

04

62

2

1,4

63

1,8

75

2,5

74 3

,08

1

6.8%

2.8%

5.2%6.1%

7.6%8.2%

0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%9.0%

‐

500

1,000

1,500

2,000

2,500

3,000

3,500


PAT (Rs. in million) PAT margins (%)


Improvement in Debt/Equity & Interest coverage ratio:

1.05

0.69

0.52 0.46

0.27

0.13

5.9

1.62.4

3.5

7.0

14.7

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

‐

0.20

0.40

0.60

0.80

1.00

1.20


Debt/ Equity (x) Interest coverage ratio (x)

Key concerns: Currency Volatility may impact operating margins: The average rupee has depreciated by 19% in

FY13 and by 29% in H1FY14. It has created margins tailwinds. If any, appreciation in the Rupee, will affect FSL’s revenue, margins and profitability.

Attrition continues to be concern: Domestic and offshore attrition has risen to 92.8% and 49.2% in

Q3FY14. Higher attrition continues to a key concern given it raises employee acquisition and retention cost which in turn will impact margins.

Offshoring of Obamacare related spends may be lower: FSL’s provider business delivery is 100%

from the US. The implementation of Obamacare policy delayed due to breakdown of its main website “Healthcare.gov”. This will result in delay of spending and impact the company’s revenue.



Valuations: We expect FSL to report moderate revenue growth with improvising operational efficiencies, focus

on customer management and healthcare segment which will help to pick up order pipeline. FSL trades at a PE of 10.3x, 7.5x and 6.3x in FY14E, FY15E and FY16E earning of Rs.2.85, Rs.3.91 and

Rs.4.68 respectively.

One year forward PE Band

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

45.00

50.00

Apr-

08

Jul-0

8

Oct

-08

Jan-

09

A pr-

09

Jul-0

9

Oct

-09

Jan-

10

Apr-

10

Jul-1

0

Oct

-10

Jan-

11

Apr-

11

Jul-1

1

Oct

-11

Jan-

12

Apr-

12

Jul-1

2

Oct

-12

Jan-

13

Apr-

13

Jul-1

3

Oct

-13

Jan-

14

Apr-

14

Close -Unit Curr 5.0 X 6.0 X 7.0 X 8.0 X 9.0 X


We recommend Buy rating on the stock with the 15 month target price of Rs. 40 per share, implying an upside of ~35.2% from current levels. We have arrived at the target by assigning to PE multiple of 8.50x on FY16E.



Financial Performance: (consolidated)

Income Statement (March ending) Cash Flow Statement Figures: Rs in million

Particulars FY12 FY13 FY14E FY15E FY16E Particulars FY12 FY13 FY14E FY15E FY16E

Net Sales 22,550 28,185 30,722 33,902 37,785

growth % 25.0% 9.0% 10.4% 11.5% Net profit Before Tax (NPBT) 760 1,592 2,015 2,798 3,423

Expenditure 20,699 25,390 27,140 29,826 33,243 Depreciation 893 884 756 815 869

Employee expenses 15,225 19,349 21,084 23,215 25,875 Interest Expenses 585 784 810 463 250

Operating expenses 5,474 6,041 6,057 6,611 7,368 Other (income/ loss) (1,151) (356) ‐ ‐ ‐

EBITDA 1,851 2,796 3,582 4,076 4,542 Operating PB change in w. cap 1,087 2,903 3,582 4,076 4,542

Depreciation 893 884 756 815 869 Change in working capital (580) (649) (427) 456 (996)

EBIT 958 1,912 2,826 3,261 3,674 Taxes paid (450) (191) (140) (224) (342)

Other Income 386 464 ‐ ‐ ‐ Net CF from operating activites 57 2,063 3,014 4,308 3,204

Interest Expenses 585 784 810 463 250 Capital Expenditure (565) (488) (301) (600) (600)

Profit Before Tax 760 1,592 2,015 2,798 3,423 Other income (4,179) 6,322 623 ‐ ‐

Tax 138 129 140 224 342 Net CF from Investing activites (4,743) 5,833 323 (600) (600)

Profit After Tax 622 1,463 1,875 2,574 3,081 Repayment/proceeds from Loans 3,687 (8,225) (2,010) (2,724) (2,560)

growth % 135.1% 28.2% 37.3% 19.7% Other adjustment (373) (659) (810) (463) (250) Minority Interest and EO items (2) (330) Net CF from Financing activites 3,314 (8,884) (2,820) (3,187) (2,810)

NPAT 620 1,133 1,875 2,574 3,081 Net change in cash or cash equ. (1,372) (987) 517 521 (206)

No. of shares 430.78 657.67 658.74 658.74 658.74 Opening cash balance 3,244 1,872 887 1,404 1,925

EPS(excl. exceptional income) 1.44 2.22 2.85 3.91 4.68 Cash & cash equivalent acquired from business acqn. 3 ‐ ‐ ‐

EPS 1.44 1.72 2.85 3.91 4.68 Closing cash balance 1,872 887 1,404 1,925 1,719

Other bank balance 4,957 14 15 16 16 Cash & cash equivalent at the end of the year 6,829 901 1,419 1,941 1,735

Balance Sheet (March ending) Ratio AnalysisParticulars FY12 FY13 FY14E FY15E FY16E Particulars FY12 FY13 FY14E FY15E FY16E

Equity Capital 4,308 6,577 6,587 6,587 6,587 Earning Ratio (%)

Reserves & Surplus 9,991 10,559 12,435 16,053 19,066 EBITDA Margin 8.2% 9.9% 11.7% 12.0% 12.0%

Shareholder's Fund 14,299 17,136 19,022 22,641 25,654 Net profit Margin 2.8% 5.2% 6.1% 7.6% 8.2%

Minority Interest 13 11 11 11 11 ROCE 5.0% 7.4% 9.6% 10.6% 11.5%

Non‐ current liabilities RONW 4.3% 6.6% 9.9% 11.4% 12.0%Long term borrowings & provisions 10,100 9,053 9,095 6,360 3,554 Sources of funds 24,412 26,200 28,128 29,012 29,219 Valuation Ratio

Gross Block 7,742 8,131 8,450 9,050 9,650 P/E (x) 20.4 17.1 10.3 7.5 6.3

Less: Depreciation 5,872 6,588 7,344 8,159 9,027 P/BV (x) 0.9 1.1 1.0 0.9 0.8

Net Fixed Assets 1,871 1,543 1,106 892 623 EV/EBIDTA (x) 8.5 9.7 7.5 5.8 4.6

Capital WIP 87 18 ‐ ‐ ‐ EV/ Sales (x) 0.7 1.0 0.9 0.7 0.6

Goodwill 23,109 23,601 23,899 23,899 23,899 Market cap/ sales (x) 0.6 0.7 0.6 0.6 0.5

Total Fixed Assets 25,066 25,163 25,005 24,791 24,522

Investments 16 27 27 27 27 Balancesheet Ratio

Long term loans & Advances Other non current Assets 1,603 1,783 1,843 2,034 2,267 Debtors Days 57 50 51 51 51

Total Current Assets 12,630 6,544 7,154 8,312 8,883 Debt/ Equity ratio 0.69 0.52 0.46 0.27 0.13

‐Inventory ‐ ‐ ‐ ‐ ‐ Interest coverage ratio 1.64 2.44 3.49 7.04 14.68

‐Debtors 3,515 3,866 4,301 4,746 5,290

‐Cash & Bank Balances 6,829 901 1,419 1,941 1,735 Dupont Analysis (ROE) 4% 9% 10% 12% 13%

‐Loans & Advances 1,502 1,778 1,434 1,625 1,858 NPAT/ EBT (tax burden) 0.82 0.92 0.93 0.92 0.90

‐Current investment 784 ‐ ‐ ‐ ‐ EBT/ EBIT (int. burden) 0.79 0.83 0.71 0.86 0.93

Total Current Liabilities 14,793 7,033 5,533 5,783 6,113 EBIT Margin 0.04 0.07 0.09 0.10 0.10

Net Current Assets (2,163) (489) 1,620 2,529 2,770 Asset /TO Ratio 2.94 3.55 3.71 3.87 4.04

Deffered Tax Assets (110) (283) (368) (368) (368) Asset / Equity Ratio 0.54 0.50 0.46 0.42 0.39

Uses of Funds 24,412 26,200 28,128 29,012 29,219

Figures: Rs in million

Figures: Rs in million




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